As a cyberneticist dating from the sixties I am continually amused by
the recent antics of the stock market. Of course it is not hard to
understand the motives of fund managers. They wish to continue in
their present lucrative employment. Most of them have not got a clue,
but believe that other managers might, so they follow any one of them who
leads. On Barvennon we see it every time we muster. A
mob in panic will follow any sheep that has got away from the mob and is
still alive.

It is not hard to see the problem that they face. The internet
is interfering with historical corporate business. Various media
gurus liken the situation to the introduction of mail order to retailing.
I've got news for them. This one is magnitudes bigger.

Over the last few decades traditional distribution-retail enterprises
have grown. Those businesses take anything from 20% to 80% of the
purchase price of a consumer item. This cut is not the retailer's
greed. It just happens to represent the labour and capital and copyright
rental cost of distributing consumer products. It is the cost of
warehouses, employees, licenses and showrooms. And as a consequence
we have huge organizations devoted to retail, and investors who have shares
in those organizations. Since much manufacturing is proprietary,
about half of available investment vehicles are distribution-retail organizations.

Then along comes a new concept, the internet. Let us take Amazon
Booksellers as an example. Instead of hundreds of Barnes & Noble
bookshop branches all over the world, we have two or a few Amazon distributor
warehouses. Because purchases can be automated on line, we need very
few sales staff.

Aha, think the fund managers. Then we will invest in Internet
businesses.

The trouble with that strategy is, the same volume of investment (amount
of cash) as in B&N bookshops is not required. The reason that
Internet businesses will become successful is that they save costs.
Although their return on necessary capital (startup) investment will eventually
be the same as any other business (i.e. at about 22%), their capital requirement
will be (by comparison) minuscule. Consequently, their gross return
will be smaller.

So not as much money will be needed in bookselling infrastructure.
There will be more money to invest in other things. The trouble is,
what are those things?

Of course managers of investment funds are
not the only victims. License and copyright holders everywhere will
also suffer. Microsoft is probably losing more than anyone else.
Bill Gates is a bit smarter than Metallica. He does not piss into
the wind.

The conclusion - Barvennon is not an economic forecasting organization,
but there is that fund manager's investment stream that is looking for
a home and nowhere to go. Looks like a classic oversupply situation.
Except it is money that is in oversupply.

It does also explain why the US is experiencing non inflationary growth.